Tax Avoidance, DOTAS, and the Substantial Incorporation Structure (SIS)

Tax Avoidance, DOTAS, and the Substantial Incorporation Structure (SIS)

9:29 AM, 19th October 2023, About 8 months ago 28

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The integrity of landlord business incorporation has been massively damaged by the attack on Property 118 and Cotswold Barristers by Dan Neidle (DN) and his largely anonymous Tax Policy Associates. In an effort to bring some stability to the situation we are left with no choice but publicly to explain in detail the history and operation of the SIS in the hope that he will adhere to his undertaking to retract his reckless destabilising allegations.

This article is the first in a series that will address all the allegations made by DN.

Tax Avoidance

Tax avoidance has been defined in various ways. The most relevant is of course from HMRC.

What tax avoidance is:

Tax avoidance involves bending the rules of the tax system to try to gain a tax advantage that Parliament never intended.

It often involves contrived, artificial transactions that serve little or no purpose other than to produce this advantage. It involves operating within the letter, but not the spirit, of the law.

The SIS is not tax-avoidance. The structure uses reliefs and exemptions in the manner intended by the legislature. There are no contrived steps with no commercial purpose. CGT incorporation relief, the SDLT rules, and the ESC/D32 shows that it is the intention of the legislature, supported by HMRC’s practice, to allow businesses to transition from one platform to another as they mature, without negative tax consequences, so long as the underlying ownership remains the same and in the same proportions on each side of the transaction. This is of particular relevance to the private rented sector given the tax regime that applies to unincorporated sole traders and partnerships, which puts an additional incentive on such business owners to move into the more transparent structure of a limited company.

The only difference between the SIS and incorporation with the concurrent transfer of loans (as advocated by DN) is the timing of the transfer of the legal titles. There is no difference in the ultimate purposes of the structures, such as limited liability status, to help succession planning, professionalisation, development of the business by use of retained profits, improved mortgage affordability criteria as well as optimisation of the tax structure.

It is also of great significance that in over 20 compliance checks since 2019 HMRC has never hinted that they consider the SIS to be contrived, artificial, or not for legitimate purposes. It is impossible to predict which case will be selected for HMRC enquiry, as to the best of our knowledge they are selected at random. This means that every case must be approached as if it was going to be enquired into, and thus every case must meet the criteria for qualification for the reliefs and tax treatments claimed.

These enquiries are comprehensive and often run for many months. The appointed tax agent deals with the enquiry, with the assistance of Property118 and the client’s appointed barrister.

HMRC requires;

  • Justification of incorporation relief against CGT with reference to the ‘business’ test, the effective transfer of the business as a going concern, the issue of shares and indemnity against business liabilities by the company, the correct calculation of share premium and of the capital gain rolled into the shares.
  • Explanation of the business case for incorporation.
  • Justification of the application of the special SDLT rules where partnerships are involved, including establishing a genuine partnership existed prior to incorporation.

The requirements of HMRC are satisfied by;

  • Evidence showing the business was operated as claimed, with financial/business records and a full narrative of the tasks undertaken, time spent etc.
  • Evidence of ownership of property assets and their use for the business, including Land Registry records, tenancy agreements, insurances, and HMO licences where applicable.
  • The full set of transactional documents which effect the business transfer with a description of the assets transferred, the company’s contractual indemnity against liabilities, the mechanism for the company discharging this indemnity, and the contract for the transfer of the legal estates. Where bridging finance is included, this is specified in the document suite. (Many accountants include this documentation in the clients’ tax returns for the year of incorporation). The SIS documentation has been scrutinised on many occasions by HMRC.

What we are able to say is that where a client who has used the SIS is enquired into by HMRC the response is sent by the tax agent and is always complete and transparent. Nothing is concealed from HMRC. This would not be allowed by HMRC in any event; they want to know everything relevant to the tax treatment of the transactions, which is the whole purpose of the enquiry.

Each completed enquiry has been closed with no adverse consequence to the client and HMRC concurrence with the claimed tax treatment. This is as near as is possible to us being able to say HMRC says SIS is ‘fine’: which HMRC will never say.

SIS is ‘fine’ when the client’s particular case meets the criteria to justify the tax treatment claimed. These criteria are correctly identified according to the outcomes from HMRC to date. HMRC will never say any tax planning is ‘fine’, but our record of success to date in the face of a significant number of detailed enquiries over several years must result in us being able to say with confidence that SIS is compliant with all tax rules where properly implemented.

DOTAS (Disclosure Of Tax Avoidance Schemes)

We have advised HMRC of our reasoning for not notifying SIS under DOTAS. The SIS has been known to HMRC since 2019 and has been scrutinised on at least 20 occasions by way of the compliance checks mentioned above. We have always endeavoured to assist our clients and their professional advisers with absolute transparency to HMRC and have no wish at all to breach any regulatory requirements.

The submissions on the relevant hallmarks, in summary, are:

  1. Confidentiality from HMRC or promoters. The SIS is not confidential-we publicise the workings of the structure widely, on our website and at landlord events. Many accountants send the transactional documents to HMRC when they submit the tax returns for the year of incorporation, as well as during compliance checks. We never use NDAs or other secrecy measures.
  2. Standardised tax product. Any client who has been through the process will know that their individual case is scrutinised thoroughly before SIS can take place. One size does not fit all.
  3. Premium fee. Our fees do not relate to the value of the transaction or the amount of tax advantage, nor are they conditional on obtaining a tax advantage. They are fixed fees, but based on fair rates for the amount of work we commit to.

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Comments

JB

11:21 AM, 19th October 2023, About 8 months ago

I am glad to see Cotswold Barristers publically fighting back against Dan Neidle and await with interest to see what DN's reponse will be

Vistaro

11:31 AM, 19th October 2023, About 8 months ago

The challenge with all this is that any prospective client thinking about doing this is now stuck between two experts contradicting each other, both “experts” supported by in depth knowledge of the workings of the tax system will be able to clearly articulate why they are right, how does the client who doesn’t have that knowledge know which way to go and if having made a decision to go with their expert of choice it all goes wrong who foots the bill and puts the client back to where they would have been or even more equitably provides recompense to put them in the same position they were promised by that expert?

Mark Smith Head of Chambers Cotswold Barristers

11:37 AM, 19th October 2023, About 8 months ago

Reply to the comment left by Vistaro at 19/10/2023 - 11:31
You are not comparing like with like. DN explictly states he is not an adviser and he takes no responsibility for anything he says.

Steve

12:15 PM, 19th October 2023, About 8 months ago

As long as the expert you are taking advice from is...
A regulated
B Has PI cover
C Is engaged by you
D Paid by you to provide that advice
The responsibility and liability should sit firmly with them so to my mind if CB meets these criteria it's them and if DN meets the criteria it's them.

Logically it seems to me that its CB that meets this criteria and DN is simply putting forward his personal veiw

Realistically until this disagreement is resolved I think most people will sit on the fence unsure of which way to go

Jim Fraser

13:23 PM, 19th October 2023, About 8 months ago

Dear Mr Smith. I see from your kind reply to another poster that you are taking comments, so I hope you don’t mind me asking a question. Mr Neidle lists amongst the contributors to his work a Mr Ray McCann, who apparently is a “former senior HMRC inspector and past President of the Chartered Institute of Taxation”, who oversaw the introduction of DOTAS while at HMRC. As far as I can understand, Mr McCann did not actually help to create the legislation for DOTAS, but nevertheless his experience of its implementation by HMRC must mean that he knows more about this subject than most. I see that Mr McCann has posted on social media, seemingly in reply to your article (is he a Property 118 subscriber?), “An in-house scheme is an arrangement designed by the taxpayer (expected to mainly be a corporate) for his own benefit. If it is made available to any other taxpayer it’s not in-house.” He obviously wishes it to be known that he contradicts your view. Is this a black and white issue, or are there two sides? Is the legislation clear on this?

Mark Smith Head of Chambers Cotswold Barristers

13:58 PM, 19th October 2023, About 8 months ago

Reply to the comment left by Jim Fraser at 19/10/2023 - 13:23
s.310 Finance Act 2004 says that where there is not a promoter any notifiable scheme or arrangements must be disclosed by the end user.
To work out if the scheme or arrangements are notifiable 4 tests must be passed, as you can see if you work through the steps in the article.
Only one hallmark applies in test 4 where the arrangements are provided to SME businesses, namely if the scheme is a financial product, which SIS isnt.
I am not sure how the other hallmarks such as premium fees would apply if the arrangements could not be offered to clients of the designer of the arrangements without falling foul of the 'promoted scheme' rules.

Andrew

17:03 PM, 19th October 2023, About 8 months ago

What a great description of the SIS process and compliance

What's more interesting is the response in DOTAS

Having been attacked by qualified people for sharing property118 articles on this topic I too shared the HMRC link to dotas and tax avoidance schemes and when I turned the question back to supposed experts which of the criterion were breached they could not answer.

I am a chartered accountant and wholeheartedly agree with what is being stated and agree with the facts put forward

Keep up the excellent work Mark Smith Cotswold Barristers Mark Alexander and team at Property118.com

Susan Bradley

17:38 PM, 19th October 2023, About 8 months ago

Very quiet about this piece on social media apart from pulling Mark to bits over his choice of words. The terms "in house" and scheme" being the issue. These people are so arrogant that they have not taken into account the use of specialist terminology v those same terms when used to address a general audience or that wonderful “person on the Clapham Omnibus”. The readers of this site are very much the general public, and it was us he was addressing because he simply does not need to explain himself to the anyone but HMRC. Allow me to explain, there a are common us-age words and there are times when those same words are used by specialists to mean something very specific.
A good example would be the term “insignificant”. To the person on the Clapham Omnibus, it means irrelevant/unimportant. To a mathematician or a statistician, it does not mean that at all! The following is from Wikipedia:
“…….The technique for testing the statistical significance of results was developed in the early 20th century. The term significance does not imply importance here, and the term statistical significance is not the same as research significance, theoretical significance, or practical significance. For example, the term clinical significance refers to the practical importance of a treatment effect…..”
So, when you are a professional speaking to another professional in the same or a similar field you are all on the same page with the terminology. Mark was NOT ad-dressing accountants and tax professionals he was addressing the person on the Clapham Omnibus. I don’t want to put words in his mouth but I think of the term SIS as being an internal framework used by staff at CB. The term somehow became commonplace amongst those using it.
However, when you have to explain to outsiders then “in house” and “scheme” have the usual common everyday meaning.
They have not rubbished or poured scorn on anything else Mark has said thus far.

Justin Lee

18:35 PM, 19th October 2023, About 8 months ago

Hi Mark Smith.
Thank you for the article and for the telephone conversation the other day. Can I please have further clarification regarding the insurance.
In the event of the HMRC finding against us, does CB insurance pay out at that point to cover us, or would we, as suggested by DN, have to sue CB for negligence and win before reclaiming our costs?

Mark Smith Head of Chambers Cotswold Barristers

18:40 PM, 19th October 2023, About 8 months ago

Reply to the comment left by Justin Lee at 19/10/2023 - 18:35
I'll write to you on this

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